2 Big Obamacare Winners

By: Soula Stephanopoulos

While there's been a lot of talk about the horrors of new health-care regulations, it's now time to stop the rhetoric and look at the opportunities for smart businesses and investors, notes Soula Stephanopoulos of Personal Finance.

Welcome to the brave new world of US health care, courtesy of the Patient Protection and Affordable Care Act (PPACA), com­monly called “Obamacare.”

One of the major changes under Obamacare is that millions of lower-income Americans will qualify for Medicaid, the federal-state partnership that currently pays medical bills for the nation’s most needy families.

It’s estimated that up to 16 million Americans will be newly insured through Medicaid by 2016, with coverage fully paid by the federal government (states now pay roughly half). While Medicaid expansion will not officially start until January 2014, about 18 states expanded their Medicaid managed-care programs in 2012, and 20 more are expected to do so in 2013.

These millions of potential new customers represent a huge opportu­nity for Medicaid health maintenance organizations (HMOs). The two larg­est in this sector are now WellPoint (WLP) and UnitedHealth Group (UNH), each with an estimated 8% market share. Another three firms each have 3% to 4% of the market: Cen­tene (CNC); Molina (MOH); and Wellcare (WCG).

As a group, these five account for just one-quarter of the US Medicaid managed-care market. There’s lots of growth potential, as each state decides on a handful of firms to manage its growing number of Medicaid enrollees.

The catch? For at least the next year, Medicaid HMOs are in a bind, be­cause they get paid a fixed amount for each new patient. While their revenue has already started to rise, profits are dropping even more.

However, starting in 2014, small rate increases combined with higher volume and cost controls are expected to boost profitability. In the mean­time, their lackluster stock perfor­mance presents a buying opportunity.

Well Connected
Of the big five, Indianapolis-based WellPoint offers the most value. As one of the largest insurance companies in the US, serving about 33 million Americans, WellPoint owns the presti­gious Blue Cross and/or Blue Shield franchises in 14 states, including Califor­nia and New York. Here’s a rundown.

Federal programs. In 2012, WellPoint doubled its presence in the Medicaid HMO sector by agreeing to buy competitor Amerigroup (AMG), with the closing expected this month. Amerigroup runs some of the highest-rated Medicaid HMOs in the US, and grew fivefold between 2003 and 2011.

Amerigroup will help WellPoint expand into what’s likely to be a lucrative new business: the 9 million Americans covered by both Medicaid and Medicare, the federal health-care program for those over 65. These “dual-eligibles” are highly costly, estimated to account for close to 40% of Medicaid spending and 30% of Medicare. About half the states are preparing to launch special programs for dual-eligibles, and WellPoint is likely to capture some of this business.

WellPoint’s CareMore subsidiary, bought in 2011, runs close to 30 Medicare Advantage clinics and has been recognized nationally for its qual­ity care, including hospitalization rates that are 24% below average.

Private insurance. WellPoint’s commercial insurance, the biggest chunk of its current business, caters to small companies (fewer than 25 employees), and it’s losing subscrib­ers to the tune of 850,000 people in 2012. However, this business might be revitalized by health-care reform.

In January 2014, all states will launch online exchanges, allowing consumers to comparison shop for health insurance. People whose income is below a certain level will be offered insurance-purchase subsidies, an option that’s expected to create 16 million new customers for US insurers.

WellPoint’s small-business focus and trusted Blue Cross/Blue Shield brand are likely to make it a strong competi­tor on the exchanges.

The fear factor. WellPoint re­cently confirmed it’s likely to post flat near-term earnings: $7.30 to $7.40 in earnings per share (EPS) for 2012 (excluding one-time charges), and the same for 2013.

Mediocre earnings and fears of falling profitability have weighed on WellPoint shares, down some 20% from their 52-week high ($74.43). Recently trading for around eight times earnings and yielding 1.9%, they offer good value given the company’s prospects.

While WellPoint might have over­paid for Amerigroup ($92 a share in cash), its finances remain strong. In fact, the company expects to return about $2 billion to shareholders in 2013, through share repurchases and dividends, leading to a potential 10% decrease in shares outstanding.

We also think WellPoint will be re-energized by a new CEO, likely to be named in the next three months. This past summer, CEO Angela Bray was forced out after a series of manage­ment snafus. A frontrunner for her job is James Carlson, now head of Well­Point’s Medicaid division and former CEO of Amerigroup. WellPoint is a buy.

MOH-mentum
A more aggressive play is Long Beach, California-based Molina Healthcare (MOH), which runs mostly Medicaid HMOs in 15 states and also owns about 20 clinics.

We like Molina because many of its Medicaid HMOs are highly rated, it’s somewhat vertically integrated, and it’s expanding carefully. So far, it has avoid­ed costly legal battles, such as Centene’s lawsuit with the state of Kentucky.

For the first nine months of 2012, Molina lost 34 cents a share (vs. a $1.18 profit the year earlier), on a 33% rise in revenue. Medical costs ate up 90% or more of the new premium income.

But there’s improvement. In Texas (now about 25% of revenue), Molina’s business is up threefold in the past year, and it’s about to break even thanks to a 4% rate in­crease in September. A rate increase is also likely in California.

Finally, Molina could be an acquisi­tion target for larger insurers seeking Medicaid exposure. Molina Health­care is a buy on dips below $25.